Why World Bank chief economist’s exit over ‘ease of doing business’ rankings might impact India

American economist Paul Romer, renowned for his “theory of endogenous growth”, has resigned from the plush post of the chief economist at World Bank after clashing with staff economists and the president of the premier institution. That this happened over the methodology that was used to determine the “ease of doing business rankings” of 2017, an exercise that benefited India by moving it up the ladder by 30 spots, while unfavourably impacting socialist country Chile, is something that must be examined carefully.

Romer is widely recognised within and outside the United States for his contribution to macroeconomic theory and his stances on growth with growing inequality. Yet, this no-nonsense professor’s continued clash with the professional economists at the World Bank, and their data crunching methods that Romer found questionable enough to raise a stink on provides a glimpse of the use and abuse of data, if any.    

Rumble with Romer

In an earlier interview with The Wall Street Journal, Romer had reportedly said that “data fabrication for political ends” had happened in the making of the doing business report. Later, he had tried to explain that he didn’t doubt the data, or indicate any political manipulation, but certainly had problems with the methodology to deduce the competitiveness rankings. In particular, he pointed out that discontinuing past indicators and introducing new ones at a time of volatile business climate globally, means that the rankings and their difference from previous years positions do not adequately reflect the investment environment in individual countries.

“This approach is only one of many different ways to see what the trend would be in Chile’s ranking when we hold the underlying indicators constant. There are other ways to do this that will generate different levels of for the ranking. The only general result that is worth considering from such an exercise is that the change in rank for Chile is smaller under any of these methods that the methods constant,” Romer has written in his blog.

The 30-spot Indian jump

While, on the lighter side, Romer’s problem with the length of the WB reports seems more about his idiosyncrasies, his critique of the Bank’s methodologies, and growth models as well as individual country analyses, must be taken seriously. This is particularly true in case of India since the ease of doing business ranking – in which India jumped 30 spots – was at odds with the domestic investment climate.

In fact, the World Bank itself announced that it would revise the methodology to re-calculate the ease of doing business index of not one but the last four years. That this mostly coincides with the Narendra Modi government’s tenure is, of course, an obvious observation. But what’s important is that India has repeatedly expressed displeasure at low rankings despite being courted much over the expanding market and investment opportunity.

That the 30-spot jump occurred in a year in which the GDP growth rate shrunk by 2 per cent because of demonetisation and GST – makes it a matter of concern. In addition, a number of other reports, many of them released at the ongoing World Economic Forum in Davos, show alarming rise in wealth concentration, steep fall in the green index as well as the inclusive development index, leaving the last year’s ease of doing business rankings, along with the Moody’s credit ratings, embarrassing outliers in data journalism that do not support hard reality on the ground.

It must be noted that the former chief economist at the World Bank was Kaushik Basu had also brought in substantial changes in the methodology in determining the ease of doing business rankings, and evidently, Romer’s comments would conflict with Basu’s parameters, under whose guidance the changes were made.

The case of ‘Aadhaar savings’

But that’s not all. Not just the ease of doing business rankings, but also the case of “Aadhaar savings” estimated by the World Bank have been comprehensively criticised by activists and welfare economists on the ground in India. In its 2016 report titled “Digital Dividends”, the Bank said savings worth $11 billion was achieved because of Aadhaar.

That much of this was “extrapolation” and that too based on studies that are themselves under a cloud after several expositions of Aadhaar-induced exclusions, discrimination and security breaches, is telling. That it was the World Bank behind the questionable and highly bloated figure, is something that we mustn’t forget while looking at the current conundrum over Paul Romer’s volatile stint and unceremonious exit over the ease of doing business index. 

However, it must be noted that Romer himself extolled the virtues of Aadhaar in early 2017, saying every country should emulate it, citing the obviously misleading report that the World Bank itself produced. Does that mean Romer wasn't aware at that point that the figures cited by the Bank in its report were problematic? Did he have a change of heart later, and does that change of heart also involve the report on Aadhaar?     

Dubious data?

In fact, even if we go by Romer’s later explanation that he didn’t mean data was forged for political ends, the doing business rankings and the Aadhaar savings report present two instances in which the data collected was itself of a dubious variety. While some have pondered if countries are retro-fitting their strategies and policies to gain preferable positions at the World Bank assessments, others have asked if the clubbing of countries with diverse needs and circumstances actually prevent individually tailored structural reforms at the altar of the global capital and systems that keep it going.

This is corroborated by the 2010 paper, “How Business is Done and the ‘Doing Business’ Indicators” by Mary Hallward-Driemeier and Lant Pritchett, that asserted that World Bank surveys and reports are markedly different from situation in the ground in individual countries. In the light of the Romer resignation, it seems the rot runs deep in one of most reputed global financial institutions, one that has left substantial imprint on Indian public policy and reforms.

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